College costs keep climbing, but the tools for saving toward them haven’t gotten more complicated — there are really just two main paths, and a set of family dynamics worth planning for around both.
529 plans
A 529 plan is the purpose-built option: money grows tax-deferred, and withdrawals come out tax-free when used for qualified education expenses — tuition, room and board, books, and more. Many states also offer a state income tax deduction or credit for contributions, on top of the federal benefit. You stay in control of the account for as long as it exists, even after the beneficiary turns 18.
Custodial accounts (UGMA/UTMA)
A custodial account is more flexible — the money isn’t restricted to education, so it can also cover a first car, a security deposit, or anything else that benefits the child. The tradeoff is that it legally belongs to the child once opened, and control transfers to them outright at the age set by your state, typically 18 or 21, regardless of what it’s spent on at that point.
| 529 plan | Custodial account | |
|---|---|---|
| What it can pay for | Qualified education expenses | Anything, once the child controls it |
| Who controls it, long-term | You, the account owner | The child, once they reach the age of majority |
| Tax treatment | Tax-free growth for education use | Some income taxed at the child’s rate |
When grandparents want to help
A grandparent-owned 529 plan used to carry a real financial aid downside on the FAFSA — that specific rule has since changed, which makes this a good conversation to have with us rather than go on outdated advice from a few years back. In practice, the simplest approach is often for a grandparent to contribute directly into an account you already own, rather than opening a separate one — fewer accounts to track, and one consistent investment strategy behind the whole goal.
There’s also an annual gift tax exclusion that lets grandparents (or anyone) contribute meaningfully without any gift tax paperwork, with a special rule that lets a 529 contribution be spread over several years at once. The exact limits change periodically, so we’re happy to walk through the current numbers together.
The right mix of accounts depends on how many children you’re saving for, how much help family wants to give, and how certain “definitely college” really is. Talk with our team to build a plan that fits your family.